Back before the election, Angus King — then a candidate for the Maine Senate seat being vacated by Olympia Snowe — explained one of his ideas for dealing with the Bush tax cuts, “We should consider pegging the sunset of these tax cuts to something non-arbitrary, like a certain amount of GDP growth, or a lower level of unemployment.” He’s right. Given our sluggish recovery, now is not the time for deficit reduction. Far from forcing responsibility now, the country would be best served by a Congress that kicked the fiscal can down the road, and focused attention on putting people back to work (preferably by taking advantage of low, low interest rates).

Thankfully, there’s still time for this to happen. As the New York Timesreported this morning, the White House is at an impasse with House Republicans, who have attacked President Obama’s fiscal cliff proposal as “unserious,” even as they refuse to detail their own plan for spending cuts and revenue increases. “We’ve put a serious offer on the table by putting revenues out there to try to get this question resolved but the White House has responded with virtually nothing,” said House Speaker John Boehner, omitting the fact that neither he nor his allies have offered specifics on revenue or spending.

Rather than try to find a path around this impasse — and in the process, pass a debt reduction bill that will put the United States on the path toward unnecessary (if more moderate) austerity — the Obama and House Republicans should agree to postpone the fiscal cliff until the economy has improved. More specifically, they should peg the Bush tax cuts, the payroll tax cuts, and the unemployment insurance extension to improved economic conditions, as measured by the joblessness rate. Rather than the arbitrary trigger of January 1st, 2013, the United States would not go over the fiscal cliff until it was economically ready to do so. At that point, Congress and the White House can haggle over the right level of spending and taxation.

Essentially, this would be similar to what happened in 2010 when the Bush Tax Cuts, along with the Payroll Tax Cut and the Medicare “Doc Fix” were extended for an additional two years. In part, this happened because the President had been placed in a politically weakened position by the results of the Mid-Term Elections, of course. Additionally, though, there was a recognition by parties on both sides of the aisle that the economy at the time was quite simply too weak to handle a tax increase, even one limited to just high-income earners as Democrats had been fighting for before the November 2010 elections. The situations isn’t all that much different today. Notwithstanding last week’s higher than expected GDP figures, due largely to temporary factors that will not be repeated in the future, the economy remains relatively weak, with some analysts estimating that 4th quarter GDP growth will come in under 2% due in no small part to the fact that many businesses are holding back on investment due to uncertainty about the future, not just of the Bush Tax Cuts but also the sequestration cuts. Add in to all of this the fact that current estimates project that the economy would in fact enter a recession no later than the 3rd quarter of 2013 if we did go over the Fiscal Cliff, and there’s at least a reasonable argument that perhaps we should consider pushing off dealing with these issues until the economy is stronger.

Politically, of course, this kind of strategy does present some problems. For one thing, if a comprehensive deal is going to be reached, it seems clear that it”s going to have to be done either now during the lame duck session or in the early part of the first year of the President’s Second Term. Any later than that, and electoral politics will start to intrude and make a real deal much less likely. The closer we get to 2014 without a deal, the less likely that there will be any deal at all. Looking further down the road, after 2014 the President will become more and more of a lame duck and people on both sides of the aisle will start making moves for the 2016 Presidential race. If a deal is going to get made, it most likely has to happen in 2013.

The other part of Bouie’s idea that could prove troubling is the idea of tying the end of the Bush Tax Cuts and other matters to something other than a definite time limit. For one thing, it’s unclear what measure of economic growth would be the right one to focus upon. Should it be GDP growth, which tends to fluctuate at times? Or, should it be the Unemployment Rate, which tends to be a lagging indicator of economic growth? Moreover, how exactly would this “trigger” work? Who exactly would decide that the economy has slipping into growth mode? How exactly would that be implemented? Finally, I don’t think Bouie fully considers the impact that an idea like this would have on the economy. In essence, it would create a high degree of economic uncertainty because businesses and investors wouldn’t be able to plan for when tax rates might increase again. At least with a fixed deadline, which I think is kind of a dumb idea to begin with, there’s a date certain on the calender that they can refer to.

The idea of kicking the can down the road does have some merit. The economy is still weak enough that it’s worth not taking the risk of pushing us into a recession. At the same time, though, if we don’t deal with these problems now we probably won’t have a chance to do so for years to come. At that point, it may be too late.

About Doug MataconisDoug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway.
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That’s the question I’ve been asking for the last several weeks. So far I haven’t received a satisfying answer. I’d kind of like to see a policy emerge from all of this. That would be more assuaging than an ongoing series of Band-Aids and cliffhangers.

We should consider pegging the sunset of these tax cuts to something non-arbitrary, like a certain amount of GDP growth, or a lower level of unemployment

I think your practical concerns make more sense than the “uncertainty” argument. This idea appeals to me, I wonder if it’s actually practicable.

The Dem argument is basically to kick much, but not all, of the can. The idea is that we’re no longer staring into the abyss… the economy is not doing well, but neither are we in recession. Accordingly, we can chip away a little bit. An limited upper-income tax increase here, a few cuts there.

The fight isn’t really over whether or not we should enact austerity, but rather the degree of austerity and who pays (higher taxes/spending cuts).

Some folks have been screaming that this is precisely the problem with the whole thing.

If we peg the income tax rate hike on job creators to unemployment levels, wouldn’t that just incentivize them to not create jobs?

(I don’t actually believe that modest changes in income taxes on the $250k+ crowd will actually affect the unemployment rate, but for those who do believe it…)

There are lots of things that probably should be tied to economic indicators — unemployment insurance extensions, infrastructure spending as stimulus, etc — but crafting the policy around that should probably be something that we plan carefully, rather than just dash off as congress is getting ready to leave town.

IMO the major economic mistake of the Bush era was in not understanding where the short run of the dot com crash ended, and where a normal, such as it was, began … leading to too many levers pulled in the run up to the housing crash.

If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken. Business is very profitable, but it has learned to get by without as much labor.

I think all the Bush tax cuts should sunset as designed, yet I’m sympathetic to the potential impacts to a fragile economic recovery.

The upper bracket tax cuts should expire as scheduled – they provide the least benefit to aggregate demand and they generate the most revenue. Then, if you want to offer raising the remaining rates, per the Republican argument that the tax base should be broader, then peg the sunset of those tax cuts to GDP growth or a level of unemployment.

Business is very profitable, but it has learned to get by without as much labor.

If enough businesses learn to get by without as much labor, they’re eventually going to have to learn to get by without consumers, because consumers only become consumers by getting cash in exchange for labor….

In the economy of the future, I suppose, there will be no more workers or consumers, just a series of algorithmic apps all trading with each other….

Business is very profitable, but it has learned to get by without as much labor.

If enough businesses learn to get by without as much labor, they’re eventually going to have to learn to get by without consumers, because consumers only become consumers by getting cash in exchange for labor….

In the economy of the future, I suppose, there will be no more workers or consumers, just a series of algorithmic apps all trading with each other….

At this point, let’s just go over the fiscal cliff and then see where we are. The Republicans just don’t seem to want to give up the Bush tax cuts, regardless of election results , the actual economy, or political leverage . There comes a point where it just doesn’t make sense to negotiate with folks that aren’t operating in objective reality.

I’ve never heard of Jamelle Bouie, but is he/she clairvoyant? How do we know the economy will be better after Dec. 31st? Is there some sort of “economy go” button of which we’re all unaware?

In any event, to a large extent at this stage of the game most of this is akin to rearranging deck chairs on the Titanic. It would take radical spending reductions to avoid ultimately smelling like PIIGS, and the reality is there are far too many Democrats in Congress, and Democrats are too skilled and ruthless politically, for that ever to happen. Then there’s the demographic, economic, educational and fiscal combined reality that Social Security will implode and it’ll take whatever then remains of the economy down with it. The notion that Gen. Y — poorly educated, spoiled rotten, largely unemployable — will be able to support first the Boomers and then Gen. X patently is absurd.

For those of us who don’t have large inheritances on the way It’s going to be a rough row to hoe. But it doesn’t necessarily have to end poorly. “The Millionaire Next Door” provides a useful blueprint. Revenue is your friend. The first rule of investing is don’t lose money; the 2nd rule is don’t forget rule No. 1. Expenses are a four letter word.

“The Millionaire Next Door” provides a useful blueprint. Revenue is your friend. The first rule of investing is don’t lose money; the 2nd rule is don’t forget rule No. 1. Expenses are a four letter word.

That is not bad advice, but it describes “savings” not “investing.”

Investing involves risk, and is all about batting average, rather than avoiding losses altogether.

Generally investors beat savers, and I say that as a guy with a savings bias.

The idea of kicking the can down the road has no merit economically (hasn’t Doug spent three years screaming about the perils of the outsize deficit) or just as importantly politically (from Obama’s point of view) which is why it isn’t going to happen

Oh wait. No. The only financial uncertainty that counts for the GOP is that generated by the health care bill passed several years ago and not going fully into effect for another year or so. Never mind.

@john personna: “Generally investors beat savers, and I say that as a guy with a savings bias.”

What we need is a financial/economic system that has no bias, or at least as little as possible. Remember the pre-2008 phenomenon where stocks would fall at every bit of good economic news? That’s because investors were so afraid of interest rates going up. Now, I’m no expert-type guy, but if you’ve got things rigged so that economic growth causes stock prices to fall, there’s something really wrong going on.

The reality is Obama has the Republicans over a barrel and he’s going to keep them there until they cry uncle. And they will ultimately believe me and I suspect they may do it without ever producing a proper detailed response although I could be wrong about that.

Savers can make good returns as long as what they have (cash for deposits) is rare. In a world with high global savings, and central banks with easy money policies, what savers have isn’t too unique. Safe banks and safe bonds don’t have to pay too much. Too many takers. There is supposed to be a proportional relationship between risk and return on less safe investments. The idea is that rational humans would only choose that risk for that return. But at the zero bound, when many have an emotional need to put money somewhere, anywhere, with return, things break down. All sorts of investments get away with paying less than their risk justifies.

How do you fix that, even as the trillions in savings remain? Hard question, but perhaps that setup justifies taxing some of it away, for the government to spend again. It forcibly changes savings to consumption.

“That is not bad advice, but it describes “savings” not “investing.” Investing involves risk, and is all about batting average, rather than avoiding losses altogether.”

Lets parse this, because there are elements of truth as it pertains to the thread, but fatal logic flaws.

1) Saving involves risk, because inflation exists. Saving at no real return means capital loss. In other words, you pick your risk of choice. This is especially relevant wrt to “kicking the can down the road,” because debt financing of the deficit will inevitably lead to inflation.

2) Tax financing of the deficit involves risk. Capital asset financing and consumption will be harmed. Investment will be lower, and consumption will be at the behest of the Feds – inefficient. Solyndra anyone?

There is no free lunch. We have a spending, not a taxing, problem. No one wants to deal with the “free” candy…………………….

No Drew…we don’t have a spending problem. Spending is flat. The problem is that Republicans spent a shitload of money and now they don’t want to pay the bill.

Republicans are incapable of governing. We’ve already seen that Boehner and Obama can come to an agreement. But Boehner can’t deliver the tea-baggers. So over the cliff we go.

The real problem is not the cliff…it’s the debt ceiling. The small-minded media focusing on the scary pretend cliff is doing the world a dis-service. The tea-baggers will burn down the world economy. That’s the danger we face. Idiots called Republicans who are unwilling to pay their credit card bill.

What I was really trying to do there was repeat an observation about psychology. Broadly “savers” do not want downside risk (excepting, as you say, inflation), while “investors” take on the risk/reward gambit.

Now how close can savers get to neutrality? Well, for much of modern history the US has offered inflation protected bonds, at positive returns. For most of the last 30 years, 10 year treasuries had positive real returns. Sadly, in this savings rich environment they don’t have to do that. People will even buy TIPS (of all things) at negative returns after inflation.

@ JP…
Except the spending that created the deficit already happened. The Bush Tax Cuts are the biggest driver of the deficit. Let them expire.
Cutting Food Inspectors so Romney can keep his 13% tax rate is stupid.
Let the Bush Tax Cuts expire and the deficit takes care of itself.

In economic terms it isn’t a cliff at all because the macro effects of the reduction in discretionary spending consequent on the tax increases et al will take months to become apparent. Months…. although it might cause a bit of temporary equity market volatility. The real cliff is a political one because tax increase with holdings, payroll tax hikes, etc would become immediately apparent to everyone and as all those polls show about 60% of the country are going to blame the Republicans particularly when the Dems introduce legislation to restore the middle class tax hikes and season it with some movement on the military sequesters that the Republicans are desperate to avert. If anyone thinks the leadership of the GOP doesn’t get this they must have a very low opinion of the intelligence of the Republican leadership. The problem is that the rank and file, and the Republican echo chamber in the media, don’t get it. Apparently the latest Republican tactic being mulled although they deny it is to pass the tax increases and attempt to get Obama wrong footed next year on all the other issues. In fact the Republicans in the senate could easily stymie this procedurally so that’s another bolt hole closed off. Obama only has to practise masterly inactivity while making sweet talk…….the monkey is still on Boehner’s back!!

in lieu of obama having some brilliant idea of how to fix anything maybe we should just let them expire. it’s the rate we were paying back then and we need to cut the deficit anyway. not like most of us will notice anymore economic downturn than we’ve had the past 5 yrs.
and as the economy goes, so goes the artificially high cost of living. and look at the bright side, he can still blame Bush and congress!

The Bush tax cuts were a test of these claims about supply-side economic policies. To justify the tax cuts the nation was, in effect, given a business prospectus from the Republican Party. We were promised that cutting taxes on the wealthy would result in much higher economic growth and broadly shared prosperity. For those who wondered how we would pay for such a large cut to the government’s revenue stream, the Republican prospectus had a remarkable claim. The tax cuts wouldn’t cost us anything. Growth would be so strong that the tax cuts would more than pay for themselves. Even those who admitted that the tax cuts might not be fully self-financing still made strong claims about faster economic growth offsetting much of the lost revenue from the tax cuts.

The reality, of course, has been quite different.

What some are suggesting is that Republicans still say “tax cuts” and “jobs creators” because it is liturgy. Even though they have lost their faith.

“…not like most of us will notice anymore economic downturn than we’ve had the past 5 yrs…”

actually bill…according to the National Bureau of Econominc Research the economic downturn, or the Bush Contraction, ended in June of ’09…which was soon after the stimulus took effect. You are probably incapable of remembering the final quarter of the Bush Administration when the economy contracted at 9%. Today it’s 2.7%. That’s a delta of 11.7% to the positive. On what planet is that an economic downturn?
If your opinions are based in total f’ing bullshit…then your opinions are…well…er…total f’ing bullshit.